Tuesday, March 17, 2015

Why MMT is still important

Mosler refers to individuals who understand MMT as being "in paradigm", which those who do not as "out of paradigm". I've had pushback from JKH about the term "paradigm" when talking about this, which is fine, but I think this post from Sankowski on China and consumer demand, who I would consider someone to understands this stuff, illustrates just how, well, paradigmatic the whole thing remains.

The issue is China switching from a production economy to a consumer one:
“China is changing from a producer model to a consumer model,” said Stephen Roach, a senior fellow at Yale University in New Haven, Connecticut, and former chairman of Morgan Stanley Asia. “That’s an enormous opportunity for the U.S.”
Surging Chinese exports blew a big hole in the U.S. labor market over the last quarter-century, all but wiping out some industries. As many as 2.4 million American jobs were lost from 1999 to 2011 as a result, according to calculations by David Autor, a professor at the Massachusetts Institute of Technology in Cambridge, and his fellow authors in a paper last year.
Sakowski adds:
“The bleeding has stopped” China is really the only economy large enough to do significant damage to the US at this point.
So who is next? Which countries can disrupt the U.S. economy with both low wages AND the the supply chain which supports those low wages.
But this whole notion of exporting countries, such as China, damaging labor markets in the US is completely out-of-paradigm. The MMT argument goes, that if China wants to trade real goods and services for US$, then the US Gov needs to run higher deficits to satisfy the Chinese demand for US$ while maintaining full employment at domestically. Any domestic labor market weakness is due to insufficient spending (as always) and not actions by the exporter. The terms of trade, in this case, are firmly in favor of the importer as deficit spending is easy, while the exporter needs to forgo the real output of their labor.

I think this highlights just how much of a mental shift you need to really look at fiat currency as what is it, instead of the various barbarous relics that continue to cloud our thinking.


Blogger Unknown said...

Well the exportsurplus of China towards the US is by identity a trade deficit run by the US towards China. Can't see how this balance-identidy can be out of paradigm. If MMT states that the US can remedy to the spending drain caused by the trade-deficit by augmenting internal spending that's fine with me. Denying that there is a spending drain and an according loss of jobs in the first place not so much. Let's take care that the paradigma talk doesn't impact on sound analysis.

12:04 AM  
Blogger Detroit Dan said...

I'm the world's biggest believer in MMT, but also believe the trade deficit issue is real and serious. The U.S. government could certainly implement a job guarantee and maintain full employment to counteract Chinese mercantilism. But at some point we will need to have goods and services which provide real value to other countries, in exchange for their exports to us. As Sankowski says I believe, our manufacturing capability, for example, shouldn't be allowed to atrophy because Chinese are willing to swap manufactured goods for U.S. Treasury bonds.

6:38 AM  
Blogger Detroit Dan said...

In other words, full employment at any given time is a vital objective, but we also want to be building a stronger society for the future. I'm sure the MMT community would agree that it's better to spend government money wisely and as needed to strengthen competitiveness down the road.

6:41 AM  
Blogger Schofield said...

One of the benefits of having a single currency created by a sovereign government is that it allows government to rapidly mobilize a nation's resources against internal and external aggression. How effectively though can it do that when it no longer as a country manufactures the key resources and especially when it's allowed its external aggressor to become its principal peacetime supplier?

9:16 AM  
Blogger winterspeak said...

Thanks all for your comments.

As a matter of identity, a trade surplus is a current account deficit, but how that's interpreted is a matter of paradigm, if you will. The article does not talk about this dynamic in terms of industrial policy, but in terms of unemployment: "Surging Chinese exports blew a big hole in the U.S. labor market over the last quarter-century".

Wrong paradigm. Hard to talk intelligently about industrial policy if we don't understand how our currency works.

11:16 AM  
Blogger JD said...

@Detroit Dan
I think it's generally a mistake to raise the "improving competitivity" argument, because that almost reinforces the mercantilist nature that is so "out of paradigm" .... Rather we should be supporting government spending that improves the lives of the majority, however that is seen to be achieved; spending in technology, healthcare, culture, even military etc can all be supported by such an approach -- without resorting to the dog-eat-dog errors of the export focussed, hard-money crew.

11:58 AM  

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